Ethics

Introduction
Senior Managers have a variety of conflicting ethical challenges to identify, understand and act upon in today’s Global Banking Sector crisis.


The global financial system ground to a halt late in 2008. We saw the fall of banks, insurance companies, advisory firms and most importantly many businesses and people’s livelihoods. This crisis was the result of four years of astonishing growth in the financial service sector with flow on effects to all aspects of the world economy. However it is becoming clear that this success, until 2007, was in fact built on unrealistic visions, unsustainable policy decisions and unsustainable business practices.

What is ethics and how does it affect the financial industry?
Ethics deals with people making decisions and acting in a manner that is “right” according to common virtues, values and norms.  Ethics are based on a set of values. Some values sought in the finance industry are the ability to behave honestly, fairly and with integrity. Over time these ethics develop into norms. As each person has different values, they have different ethics. In different environments different norms or rules develop. People then judge what is right or wrong compared to their views and value base. This framework relates to all aspects of life including banking, finance and the management of these industries.

The business, ethical and leadership challenges:
Senior Managers are a central point between The Company, The Products, The Business Environment, Regulator and Government requirements and of course the end Customer.

Within each of those links there exists a variety of ethical dilemmas. An ethical dilemma exists when a decision will result in two opposing outcomes that undermine the person’s values and ethical position equally. While many of those same ethical dilemmas existed in the lead up to the crisis, at each point, we have seen that decisions were made that resulted without taking into account a long term sustainable set of values resulting in what now can be seen as a failure.

No dilemma is stronger than the ongoing conflict between the expectation of return on investment of the shareholders and the healthiness of the business. The business contains many stakeholders each with specific expectations. These stakeholders include the company, it’s people, the environment around it, both commercial and physical and also must take into account the future. All things being equal across financial services, the balance between shareholder and stakeholders should be the same. As we have seen from the current crisis this is not the case. For example, Northern Rock managers, continued to act irresponsibly knowing full well that to remain competitive they had to this to the detriment of destroying capital reserves and losing the trust of its customers for short term gains.

The Business Environment
Evidence highlights that within the competitive financial services market once one bank or institution enters a market or offers a financial instrument, others are quick to catch on. That is, the good or bad strategy of one bank may be repeated quickly. In the case of the current crisis, we saw that UBS was one of the first banks to undertake a capital arbitrage when switching from Basel 1 to Basel II capital requirements. They made considerable profits and also were able to free up capital for more aggressive market growth. Soon all other banks undertook these ‘bad’ unsustainable changes to capital structure to remain competitive with UBS. The dilemma here for Senior Managers is one between keeping the shareholder investment and business competitive or to ensure the long term future of the bank.

The Products
In the same way as a toy manufacturer considers whether the sharp edge on a child’s toy is going to land them in court for negligence, the senior manager needs to take careful consideration of their product offering. At the heart of the financial crisis, subprime mortgages were sold to people who couldn’t afford them, then bundled, carved up, rated and resold as financial instruments to financial service providers who also couldn’t afford them. Senior managers show the same negligence for possible outcomes as the toy manufacturer. In the case of the financial crisis, many banks developed many sophisticated products of which the Collateralised Debt Obligations were just one. Senior managers knew they weren’t worth what they sold as. Worse, they showed they knew they weren’t worth the amount by betting against the products sold by shorting the instrument. Senior Managers need to recognise the position they place themselves in by offing a dangerous or irresponsible product, moreover be able to accept that if they display the knowledge that they are negligent they have even more to answer for.

The Company
The senior manager’s role within the company is to act as a leader and provide guidance for the firm and all stakeholders involved, as well as consider the owners of the firm and those shareholder investment expectations. This role includes developing a company culture. A company culture can be nurtured and supported by rewarding and symbolising various behaviours. Financial Service companies have reportedly instilled very ‘win at all cost’ type competitive cultures with a direct focus on shareholder value. Rose’s (Corporeat Directors and Social Responsibility: Ethics vs Shareholder Value 2006) findings showed that directors consistently gave up their CSR and ethical responsibilities in favour of increased shareholder value.  As leaders of the company, this then tempts those parts of the culture to override some of their other values such as honesty and integrity for the sake of being the top of the league board. Senior Managers need to face that this culture may not be sustainable and make ethically based decisions on how to refine the company culture to balance shareholder and sustainable company practices. We saw in the crisis that many banks got trapped into allowing these competitive cultures to develop and saw that other banks, particularly community banks, kept removed from these win at all cost cultures allowing them to be relatively strong in the crisis.

A senior manager is involved developing its human resources. This is a very popular subject currently with the current furore over remuneration for bankers. Research published by the academny ofmanagement, Schweitzer et al 2004, showed how goal setting can be a motivator of unethical behaviour. Not only on job design, Senior Managers need to question his or her values and ethics on how much remuneration a banker is worth. Considerations must be made on how much should be paid considering how much damage was caused with banker’s actions. Similarly how much money was needed to bail the companies out. However the opposing view or consideration is that to retain the talent and knowledge the labour market puts a high price on bankers. This balance is a very contentious one affecting not only his subordinates but also his or her position on what he or she considers the correct remuneration for his or her work each week. Finding the correct equilibrium will be a very large task with or without government intervention.

Should a Senior Manager feel a sense of what are the best ethical practices and corporate social responsibilities then it is their task to act upon them. As leaders of the company the need to convince and motivate others to see that this is the best way to do business. They must look at the role they are meant to do in its entirety. Without internal leadership there are no further options other than external pressure. In the same way as Paul Moore saw his job as being a whistleblower, the job of the senior manager is to impress upon the company their beliefs and values.

Poor leadership can have a negative result. Richard Fuld, CEO of Lehmann brother leading up to bankruptcy knew that he was steering a sinking ship. His values seemed to support not admitting this was the case and was happy to convince himself that he too would be bailed out. His rationalisation was not to do the right thing and admit there were issues but continue the negligent and irresponsibly blind culture of its unsustainable banking practices.

Regulators
One key conflict that has emerged from the financial crisis is that between the financial services industry and governments and regulators. The IMF released research (” A fistful of dollars, Lobbying and the financial crisis, Igan et al 2009“) showing the correlation between the crisis and lobbying of regulation changes that fed the crisis. Since 2002, lobbyists sponsored by the financial services industry have been working to change a variety of rules and regulations that made it easier to generate shareholder returns particularly in the form of taking more risks. As a senior manager who must work and act on behalf of the company within the rules and regulations of the government the decision must be made whether it is ethically sound to create conflicts of interests by supporting lobbyists to lobby for changes that allow your company to benefit. Here the idea of fair game play becomes a value that a forms the ethical position of the senior manager. Part of this aspect is the interesting correlation between former bankers then becoming regulators. While it does makes sense to have experience financial service professionals in such positions the temptation for conflict of interest is great. Senior managers need to be aware of these conflicts, should they feel their values do not include utilising conflicts of interest for their own good.

Other issues such conflict of interest involving rating agencies being paid to rate instruments higher than what they are worth can be seen, as we saw in the Manfold Toy case in the same light as paying an external auditor to inflate the value and perception of the company. Senior managers need to consider these comparisons and perhaps as a quick test on themselves answer whether they would act in the same way under the same circumstances if it was a different industry.

From these few examples we see that the Senior Managers job is a minefield of decisions. Senior Managers are currently working to make right their wrongs. My skeptiscm says many are doing so only for image rebuilding but not necessarily making wholesale changes to the operations of their organisations.

Conclusion:
I have deliberately tried to not impose my conclusions on each dilemma above to then go onto talk about the individualism of ethics. Highlighted by discussions in class about the use of grey money in China we see that each country, each region, each company and for that matter each person has their own set of values and ethical boundaries. The boundaries are the threshold for how far a person will part from their beliefs, ethics and morals. Codes of Ethics and Corporate Social Responsibilities all attempt to shape and cultivate common values and thus ethical boundaries. Although many of these values are developed during our upbringing, religion, schooling and development by understanding oneself Senior Managers need to be aware and able to make changes to their actions and to stand up to what they believe. Often when choosing between right and right they learn about themselves and their organisation. Reflecting on that provides the opportunity to manage future dilemmas. While it is unlikely that all parties and stakeholders (including shareholders) can be pleased perhaps on the basis of strong values, clearly stated ethical guidelines Senior Managers can be empowered to convince all parties of the balance and thus benefits of doing the right thing. In essence the biggest ethical challenge is with the senior manager him/herself on what position they will take and how they will act as a leader within the financial services industry.